The debate around the Bitcoin price manipulation resurfaces

A 15% price drop last Tuesday rekindled the argument

As the third quarter of winds down, the momentum of Cryptos which was set ablaze by the rapid rise of Bitcoin in Q2 has all but fizzled. The recent ‘flash crash’ took the premiere digital coin below the all-important support level of $9,000 that it had held since mid-July. Flash crashes are not that uncommon in financial markets. Being a trader myself, I have seen a fair share of those in Forex markets & stocks.

Considering the Cryptos are not as liquid as the other two financial markets & unregulated to a large extent, every time an incident like this happens, it triggers a debate whether the price of Cryptos in general & Bitcoin, in particular, is manipulated. Before we move on to address this issue, here’s the performance of the Top 10 Cryptos in the month of September.

Figure 1

Bitcoin has been the sole driver of the Crypto rally earlier this summer and held its gains relatively well. Alt. coins, on the other hand, remained anemic for the most part posting steeper falls & anemic gains. September seems to have turned the trend — at least for Ethereum. While most of the Top10 coins have posted double-digit losses on the month, including Bitcoin which flunked 16%, Ethereum is finishing flat.

Bitcoin has nullified the bullish setup with more than 25% drop in the third quarter of 2019. The original support turned resistance zone in the $9000-$9400 area needs to be taken out to overcome this bearish bias.

Figure 2

Coming back to the recent flash crash — It all started on Sep. 23 when Bitcoin’s hash rate metric dropped from an all-time high of 104 h/s (hashes per second) to 57 h/s in a very short time (Figure 2). Hash rate has long been considered as a measure of the commitment of resources to the Bitcoin mining process. More importantly, analysts predict that hash rate movements are usually followed by price action in the digital asset.

The sudden 40% drop in mining resources sparked alarm among Bitcoin enthusiasts. Although the hash rate doubled the very next day to 114 h/s, the fears of an accompanying price drop realized the very next day when BTC dropped about 15%. Unlike the hash rate, however, the price did not reverse and the argument about a price manipulation immediately ensued.

Figure 3

This is not the first time that we are hearing the debate about price manipulation in BTC. On multiple previous occasions, Crypto Whales & digital exchanges like Bitstamp have been pointed fingers at for causing market crashes to benefit from the price movements. A new study by Arcane Research has shed some light on the issue saying that CME’s Bitcoin futures settlement dates might have something to do with it.

Analysis conducted for the period between Jan. 2018 to Aug. 2019 found that the price of BTC fell immediately before CME issued payouts — 75% of the time (Figure 3). What made the price fall especially conspicuous this time was that it also coincided with the much-touted launch of the Bakkt BTC physical futures platform.

Figure 4

Another trend that came to light from the research is that BTC price has fallen sharply before settling in months where the daily average return has been particularly high (Figure 4). With the exception of July, higher average daily return in previous months was followed by sharper declines closer to the futures settlement dates.

Statistically speaking, it is highly unlikely that 15 out of the previous 20 instances of BTC price falls in advance of CME settlement is a pure coincidence. Arcane concludes that the probability of this happening is less than 2%, given the same number of positive and negative days over the period.

The broader data from Arcane study supports the hypothesis that BTC price is, in fact, being manipulated in advance of the CME future settlement. This, however, might just be institutional investors’ strategy of hedging. Arcane argues that further analyses of micro-level data & qualitative studies may be needed to confirm “deliberate manipulation.”

One way or the other, we seem to be moving closer to the conclusion that the role of institutional investors is becoming the determining factor in the price movement of Bitcoin… deliberate or not.

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